Recycling as a Strategic Supply Source

We investigate how recycling can be a strategic source of supply in the presence of a changing supply market. This research is inspired by the metal cutting tools industry, where challenges regarding a key raw material present an opportunity for the manufacturers to create an alternative supply source by recycling. In this study, there is a virgin material market that supplies two manufacturers differentiated in their recycling ability. The problem is formulated as a game, where the manufacturers first make a decision to recycle or not, and then decide on their respective production quantities, and recycling rates. Depending on the fixed recycling cost relative to the unit cost of the virgin material, as well as the recycling cost structure of the two manufacturers, there are four possible equilibria: both manufacturers recycle, neither manufacturer recycles, only the more recycling‐capable manufacturer recycles, or a scenario with two Nash equilibria (either manufacturer recycles whereas the other does not). We show that recycling is indeed a strategic supply source resulting in higher quantities and profits. Interestingly, a manufacturer may recycle less if the unit cost of the virgin material increases, at high recycling rates. This result emphasizes the importance of carefully modeling the recycling cost structure. Although a recycled unit has necessarily a lower life‐cycle environmental impact than a unit made of virgin materials, the industry‐wide environmental impact can be higher in a recycling scenario due to higher production quantities overall. Welfare, however, is higher with recycling.